UK: The Japanese Natural Disaster And Its Consequences: Legal Issues Arising For The Shipping And Trade Industries

The earthquake that struck off the northern Pacific coast of
Honshu, Japan's largest main island, in the early hours on
Friday 11 March was the fourth largest recorded in the world since
1900. It caused extensive damage to property within several hundred
kilometres of its epicentre. However, the greatest impact of the
earthquake was from the resultant tsunami which swept through many
coastal towns causing significant loss of life and human
suffering.

The tsunami also affected the ports and coastlines of Fukushima,
Miyagi, Iwate and Aomori, collectively known as the Tohoku region.
In addition to tsunami damage to ports, shipyards and the regional
fishing fleet, there were various reports of ships and ferries
running aground and suffering damage.

Furthermore, the nuclear power station at Fukushima was damaged
and this has caused considerable concern over the risk of
uncontrolled radiation leaking from the damaged nuclear reactors.
The authorities have evacuated the immediate area and are
monitoring radiation levels to ensure that those in the area do not
suffer the effects.

The tsunami has proven to be the biggest natural disaster to
affect Japan since an earthquake levelled Tokyo and Yokohama in
1923. The Japanese Cabinet Office reported on Wednesday 23 March
that direct losses of between 16 trillion yen (US$198 billion) and
25 trillion yen (US$309 billion) have been incurred as a result. If
this estimate is correct, the resultant losses will exceed those
resulting from Hurricane Katrina in New Orleans in 2005, which the
insurance industry assessed to be in the region of US$125
billion.

Beyond the unimaginable human cost of the disaster, there has
been and will continue to be significant impact on the Japanese
economy and widespread repercussions for the shipping and
international trade industries. This briefing aims to set out some
of the issues that have been encountered by these industries as a
result of the tsunami and that will continue to be faced in the
immediate future.

Shipping

The principal effects of the tsunami on the shipping industry
relate to port infrastructure and the flow of import and export
cargoes. Japanese ports, which handle about 7 percent of the
country's industrial output, were badly hit. The ports in the
northern part of Japan were severely damaged, although the Japanese
transport ministry reported on 23 March that most key ports (12 out
of 15) had re-opened and were usable for recovery efforts and
general use. Only the ports of Ofunato, Ishinomaki and part of
Ibaraki remained too damaged to be used, although the ministry
stated that it was working to re-open the sea routes at those three
ports. It has further been reported in the press that grain cargoes
are reaching Japanese ports after disruptions at terminals, the
shipments having been transferred to southern Japanese ports
without much difficulty. Nonetheless, there remain a number of
concerns for ship-owners and charterers.

Safe port issues

Various safe port issues arise, including as a result of damage
to port facilities and equipment, the risk of damage to vessels,
the possibility of aftershocks and potential radiation risk from
the Fukushima nuclear plant. Owners might also be concerned that if
they call at a Japanese port, they may subsequently not be allowed
to trade in another country for fear of radiation risk.

Ship-owners may be reluctant to call at particular Japanese
ports in case they have become unsafe. Parties to charterparty
contracts which provide for loading or discharging at a Japanese
port should review the terms of the charterparty carefully before
deciding on which course of action to take.

Where the charterparty contains a safe port warranty, the
warranty will be prospective. This means that at the time of
nomination, the port should be prospectively safe to approach, use
and depart from for the period of the vessel's likely visit, in
the absence of some abnormal and unexpected future event.

In the case of a time charter containing a safe port warranty,
where the Japanese port was nominated prior to the earthquake but
the port is likely to have become unsafe by the time the vessel is
due to load or discharge there, then the time charterer may be
obliged to give new voyage orders, so long as the vessel can
effectively comply with those new orders. In the case of a voyage
charter, the position is less clear and a detailed review of the
terms of that charter will need to be undertaken before any
conclusion is reached.

Regarding radiation risk, it is not at present clear how wide
this risk is in physical terms. A ship-owner may be reluctant to
sail near the plant and especially within the exclusion zone for
radiation, arguing that the risk of radiation makes the port
unsafe. However, if the radiation risks prove to be exaggerated and
unjustified, an owner may find himself in breach of charter for
refusing orders to go the relevant Japanese port, particularly if
it is out of the "immediate" risk zone. Ship-owners
should therefore not refuse voyage orders to call at any Japanese
port lightly, because many ports outside the earthquake and tsunami
area are operating normally. The fact that grain shipments have
been successfully diverted to southern Japanese ports supports this
view.

It is recommended that potentially affected ship-owners keep a
close eye on developments and update themselves in terms of the
prevailing conditions at the relevant port before taking any
decisions as to whether charterers' orders are legitimate or
illegitimate. Port authorities and local agents should be consulted
for updated reports relating to the situation on the ground and
Japanese government website consulted in respect of radiation
risks.

Deviation

Parties to the charter party should also consider whether it
contains any liberty to deviate to a different port although,
absent such an express provision, the ship-owner (in the guise of
the Master) has an implied right to deviate in order to avoid
danger to the vessel, cargo or those on board. As to whether the
risk of radiation will be deemed sufficient justification for a
deviation, this will depend on the relevant facts in the particular
circumstances.

It may be that the parties to a voyage charter party wish to
come to a new agreement and vary their charterparty to allow
discharge at a different port. Any such variation should, among
other things, also allocate responsibility for any additional
expenses arising out of the deviation.

Where a decision is made to tranship cargo, consideration must
be given as to who bears the costs of such transhipment.

Bills of lading

Where the cargo is going to be delivered at a substitute port,
then the bill of lading terms should be examined to see whether the
bill incorporates the terms of the charterparty in question.
Alternatively, the bill of lading may contain its own liberty
clause, which permits deviation in these circumstances to another
port. In the absence of such a provision, it may be that discharge
at a port other than the one named in the bill amounts to a breach
of the owner's / carrier's obligations under the bill of
lading. Clearly also, the owner must make sure that even where
there is a liberty to deviate, any delivery of the cargo at an
alternative port is made only to a party entitled to take such
delivery.

Any additional expenses incurred by the owner as a result of the
deviation may be recoverable from cargo interests but this will
depend on the terms of the relevant liberty clause in the contract
of carriage.

Frustration / Force Majeure

The parties to the charterparty should check whether their
contract contains a provision that allocates risk as between the
parties in the case of supervening events. If so, such a provision
would specify where responsibility lies in the case of such an
event. However, where there is such a provision, but it does not
expressly cover the earthquake / tsunami scenario, then one or
other of the parties might seek to rely on frustration of the
contract.

Under English law, it is rare for a party successfully to
demonstrate that its contract has been frustrated. This will
require the party alleging frustration to establish that
circumstances have changed to such a radical extent since the
contract was concluded that the contractual obligation in question
can no longer be performed or, if performed, would be very
different to the obligation which was originally undertaken. Mere
inconvenience, hardship, additional expense or delay will not
generally amount to sufficiently frustrating factors. However,
where the vessel itself is damaged as a result of the tsunami,
there may be an argument for frustration. Furthermore, in certain
circumstances, a delay may be such as to amount to frustration and
this will depend in part on the length of delay as against the
length of the charterparty, although this is not a conclusive
factor. By way of example, in The Sea Angel [2007] EWCA
Civ 547, the Court of Appeal held that a delay of three or so
months towards the end of a short (20 day) time charter caused by
the unlawful detention of the vessel by the port authorities did
not frustrate the charter.

Whilst there is no general concept of force majeure in English
law, there may be a force majeure clause in the charterparty and it
is arguable that an exception such as "Act of God" would
cover the Japanese disaster. Again, however, the relevant provision
and the prevailing circumstances would have to be considered
closely by the party seeking to rely on force majeure before
concluding whether or not there was a force majeure event.

Delay

The congestion at Japanese ports (and possible damage to
equipment / facilities) that will have resulted from the disaster
will mean that any vessels already at Japanese ports, or due to
call there, are likely to experience delays in loading or
discharging their cargoes. Time charterers might seek to argue that
the vessel is off-hire in such circumstances but, generally
speaking, hire will continue to run unless the charterparty is
frustrated or the vessel is ordered to an alternative port pursuant
to any relevant charterparty provisions. However, the wording of
the off-hire clause in the charterparty will need to be reviewed
carefully. For example, the standard un-amended clause 15 of the
NYPE time charter lists specified off-hire events and ends with the
words "or by any other cause". The amended (and expanded)
version adds the word "whatsoever" to the end of that
phrase. It is arguable that, in the case of the former un-amended
wording, the off-hire clause will not cover a port closure, whereas
the latter amended wording might. On the other hand, damage to the
vessel resulting in a loss of time might arguably be covered by the
unamended wording.

As regards a voyage charterparty, where notice of readiness has
been validly tendered and laytime has already commenced, then the
vessel is liable to be on demurrage unless the voyage charterer can
rely on any exception or interruption to laytime.

Dangerous goods

The radiation from the damaged nuclear reactors has been known
to have affected food and water within the surrounding area. There
arises therefore the possibility that certain cargoes on board
vessels may have been affected by the leaking nuclear radiation.
This may give rise to subsequent cargo claims. Alternatively, there
may be claims that affected cargoes are dangerous cargoes entitling
owners to refuse to load them. Again, parties need to review their
contractual provisions carefully and assess the actual exposure to
radiation before deciding how to proceed.

International Trade

Japan is the world's third largest oil importer and the
largest purchaser of thermal coal and LNG in the world. Japan also
has a large steel industry, ranking second only to China in steel
production. Japan is furthermore a major importer of commodities,
including agricultural products. It was reported on 24 March that
Japan has secured enough extra LNG supplies to compensate in the
short-term for reduced power generation capacity as a result of a
number of coal-fire and nuclear power plants going offline.
Furthermore, as stated above, shipments of grain have been rerouted
to alternative Japanese ports in the South. Nonetheless, there
remain a number of legal concerns for traders and others in the
commodities business.

Frustration / Force Majeure

As outlined above, frustration of contract is a difficult
argument to advance successfully under English law. The fact that a
sale contract may have become more expensive or burdensome to
perform, for example, because of difficulties in production or
transportation issues, will not generally amount to frustration. By
way of example, in the case of The Mary Nour [2008] EWCA
Civ 856, the Court of Appeal held that the seller of a cargo of
cement was liable to the buyer for failure to supply the cement as
required under the sale contract, notwithstanding that this was due
to the commercial pressure exerted by a third party, a state-owned
company that operated a cartel in the relevant area. The fact that
the original supplier chose not to make the goods available did not
amount to an event frustrating the sale contract.

Traders who anticipate problems in fulfilling any contractual
obligations should check their sale contracts for any force majeure
provisions to establish whether any such provisions cover the
Japanese disaster.

Payment for goods

To date, there have been no reports of major disruption to the
Japanese banking system. Therefore, payment under sale contracts by
letter of credit should not have proved problematic.

Shipment of goods

Traders who are also charterers of the ship nominated to
transport the goods under a sale contract may find themselves
liable for demurrage. The charterparty should be reviewed carefully
to check whether its provisions expressly provide for the
interruption of laytime or demurrage in the case of a force majeure
event. Alternatively, traders may face cancellations where the
laycan period expires without loading having commenced. Again,
contractual provisions should be considered carefully to assess the
legal consequences.

Condition of goods

It should also be noted that some concerns have arisen with
regard to cargoes becoming affected by radiation, so that they may
no longer meet their specifications under the sale contract. The
buyers may consequently refuse to pay for and / or take delivery of
the goods. The sellers may be required to provide alternative goods
from another source, depending on the terms of the sale contract.
Alternatively, there may be countries which refuse to allow the
discharge of goods which may have been affected by radiation even
though the goods might in fact be perfectly sound.

Insurance

Traders should check whether their cargo insurance covers the
type of risks being encountered in Japan, including additional
forwarding costs and the potential damage or deterioration to any
goods, for example stored in warehouses.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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It is common practice for traders, usually when they are the sellers of the goods and the charterers of a vessel, to instruct the carrier to discharge cargoes without production of the original bills of lading and to agree to indemnify the carrier against the consequences of doing so.

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